Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions on how to ask a question will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please, go ahead.

Good morning, and thank you for joining Ralph Lauren's first quarter fiscal 2021 conference call. With me today are Patrice Louvet, the Company's President and Chief Executive Officer; and Jane Nielsen, Chief Operating Officer and Chief Financial Officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to one per caller. During today's call, we will be making some forward-looking statements within the meaning of the federal securities laws, including our financial outlook. Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties. Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release, and to our SEC filings that can be found on our Investor Relations' website. And with that, I'll turn the call over to Patrice.

Thank you, Cory. Good morning, everyone, and thank you for joining today's call. The past few months have marked a period of extraordinary challenge, but also resilience, agility and hope. Our financial performance this quarter reflects an unprecedented three months of COVID-19 related impact around the world. We're taking the opportunity to leverage this period of disruption to accelerate our core strategic focus areas, drive new areas of growth and we aligned our resources accordingly. Building on the strong foundational work our teams had done prior to COVID, over the past few months, they have executed with incredible agility and speed to strengthen our connected retail capabilities, further rationalize our North America brick and mortar wholesale presence, and continue to build our brand through personalized consumer engagement and more values based messaging, all while pursuing our brand elevation journey as evidenced by our strong AUR in gross margin progress. Since, Ralph started our company more than 50 years ago, his focus on the long-term and the spirit of timelessness has enabled us to not only survive times of uncertainty, but drive lasting authentic connections with our consumers. To that end, we have a responsibility that goes well beyond the products we sell. And I first want to take a moment to address the persistent, systemic racial injustice in the U.S. and around the world. We've been listening to our teams and a few of the many actions we've taken over the past couple of months include: one, we committed to elevate more black and African American talent into our leadership ranks. We will interview two underrepresented candidates for every open leadership role, and we are committing to ensure that people of color represent at least 20% of our global leadership team by 2023. We are examining how we portray the…

Thank you, Patrice, and good morning, everyone. This quarter was undoubtedly one of the most challenging periods in our Company's history. All of our reportable regions and physical channels faced retail closures and consumer self-distancing on a mass scale. As we started reopening stores with new safety protocols, reduced hours and capacity restrictions, consumers remained cautious, as expected, but we were encouraged by the sequential improvements across each region. During the quarter, we continued to leverage our key strengths, starting with our balance sheet, which is a real competitive advantage through this crisis, and gives us the flexibility to continue to execute our plan and elevate our brand. We ended the first quarter with $2.7 billion in Cash and Investments, and $1.9 billion in total debt, which compared to $2 billion in Cash and Investments, and $692 million in debt at the end of last year's first quarter. Building on our actions in Q4, we took additional precautionary measures to preserve cash and strengthen liquidity in the first quarter. These actions included, first, the issuance of $1.25 billion in debt in June with proceeds going towards the pay down of our revolver August 2020 notes, and the remainder held for general corporate purposes as we continue to manage through COVID. Second, we continue to reduce our cost to align to our top line and better align with our long-term strategy, with first quarter SG&A down 30% to last year. Third, we reduced our wholesale footprint by more than 200 doors this quarter and we'll continue evaluating our presence as we move forward. We also worked closely with our wholesale partners to reduce our outstanding receivables by more than half since the start of the crisis. In addition, we have improved our working capital and cash conversion cycle from the start…

[Operator Instructions] The first question comes from Laurent Vasilescu with Exane BNP Paribas.

Patrice, Jane, as you can see realized during and post-COVID, where are you focusing your Organization's energy to remain on the offense and winning in this new environment? You referred to upcoming adjustments to your strategy and the operating structure, can you provide more color on key considerations guiding this work? And for Jane, I understand you're not giving guidance, but what do you feel is not currently understood by the investment community as we try to model out the next few quarters? Thank you.

Good morning, Laurent. Welcome back. And thank you for your question. So listen, we are determined to win in this very dynamic environment, and as I look at our core strategic choices, which you know well, we believe they are broadly still relevant today. But obviously, the landscape is shifting rapidly and we're proactively evolving our strategy to remain on offense, which includes accelerating certain strategic choices over others. So, I thought I'd share a few examples of how our teams are working with agility and resilience to bring all this to life. First on winning over a new generation, we're putting even more emphasis on purpose and values based communication, and you saw some of that with our Pride campaign, recently, coupled with targeted, personalized digital marketing which - both of which are actually resonating quite well with current consumers, and new consumers, and you'll remember our ambition is to get to one-to-one marketing, ultimately. Within our product assortment, one of the thing, I think, that really stands out for Ralph Lauren relative to the number of players in our peer group is the fact that we are a lifestyle brand. We are now attached specifically to one product category or another, we truly have this incredible ability to flex across categories. And so, we're leveraging this to put more emphasis on areas that are resonating most with consumers right now. For example, that is both our focus on the core, and also new under-developed categories that we are focusing on now, like Home or Loungewear, for example. Within our ecosystem, so you'll remember, we're looking to build holistic omni-channel ecosystems in a limited number of big cities around the world. That's our go-to-market strategy. We're putting more emphasis on connected retail and refining how we integrate these capabilities…

I'll take the second part of your question. And we're glad you're back. Let me try to give you some comments as you think about the next few quarters. Like many competitors we're watching changing regional dynamics and resurgences very carefully. But I think there is a second dynamic at play, which is the cadence of our business recovery, which really ties into our continued strategic focus on elevating our brands and driving quality of sales even during this pandemic. The way we're thinking about it based on what we know today is, I think, it's reasonable to expect that Q2 revenue will continue to see an improvement, but then our recovery will proceed at a more moderate pace than our Q1 exit rate, where we had the initial benefit of store re-openings. I think the most significant, uncontrollable is traffic, where we still expect it to be a pressure point as we move forward, along with the broader macroeconomic environment. However, what we can control are the proactive decisions that we are making to elevate our brands and position them to return to healthy and sustainable growth. Now that will play out on the wholesale side, in that, we expect our reported sell-in to continue to be heavily pressured as we prioritize healthier sell-out, and healthy inventory level. Our sell-out trends are encouraging, thus far, and our inventories were down meaningfully at the end of Q1, but we intend to continue this journey, especially through Q2. And on the DTC side, while nearly all of our stores are open, we expect the pace of recovery to be more gradual as we leverage this period to prioritize quality of sales, and meaningfully improve profitability in our DTC channel, especially our digital channel, where operating margins expanded by a 1,000 basis points in every region in Q1. Now, I know that these decisions in the short-term will temper the speed of recovery in our reported sales, in both DTC and wholesale, but it will better position our brands to return to more normalized trajectory as we move beyond this period. But we're analyzing this day-by-day, and really leaning into our strategic choices.

Thank you. Next question, please.

The next question comes from Matthew Boss with JPMorgan.

So, on North American wholesale, maybe - what's the best way to think about the pace of recovery as we think about North American wholesale in the second quarter or the back half of the year, relative to the 93% 1Q decline. And with that, Patrice, coming out of the pandemic, is there any way, maybe, just to elaborate on initiatives, or opportunities you see to re-map demand for the overall brand over time in the face of the partner door consolidation that we're seeing today?

Yes. Why don't I give you a little bit of color on how we're thinking about North America wholesale, at least in the coming few months. We are, as I said, encouraged by the week-on-week improvements that we saw in Q1, although our trends were still negative as we exited the quarter. And we do expect that indoor and mall environment could remain challenged through the coming quarter. But as we move into fall holiday, we are very clear that we're going to continue to prioritize inventory management, which could be headwind to sell-out if demand picks up, but it is really important for our long-term strategy. But as we expect trends to improve as we move into fall, at that, when we expect to start to close the gap to get to more normalized levels that were pre-COVID as we enter into spring '21, we're still taking a cautious approach, but I think that that spring '21 starts us get to - starts - all things holding, start to get us back to that exit rate that we saw before we went into COVID. That said, there is a lot of uncertainty in the market, but we feel good about our position today, Matt. Our inventories are clean, we're keeping them that way. We're happy with our sell-out that we're seeing in the environment, but obviously, the environment has some uncertainty that we're watching.

And then, to the second part of your question in terms of re-mapping demand, and our focus is, specifically, I guess, on North America. If you look at our go-to-market strategy going forward, it has a few components. First, we want to focus on key cities, all right. And actually, which is to fund in the U.S. as we have a lot of white space opportunities from a key city standpoint. Second is, within each of these key cities, we want to make sure we have a balanced omni-channel ecosystem. And likewise here, we believe there are opportunities to rebalance it. So, what are the key components of it. First is our DTC, second is digital commerce, all right. And digital commerce is four components in our minds. It's ralphlauren.com site, and you heard Jane talk about all the work we're doing to elevate AUR, strengthen profitability, better connect with consumers moving forward. There are pure players, those - the presence is more limited in the U.S., but that business is developing, obviously, much stronger in Europe and in Asia. The third area is wholesale.com, which is very good momentum in the U.S. We're actually very pleased with the progress that we're making with our partners there. We're investing disproportionately additional capabilities with them to further accelerate our performance and enhance brand presence. And fourth is social commerce which is still nascent. So think of this as Instagram checkout, for example. We are now available on Instagram checkout. I think a little anecdote is we're are the first home business actually on Instagram checkout. We expect to see significant growth from these four components of digital commerce. And then, the third element of this plan is the top doors of our wholesale partners. And you've seen over the recent announcement that we have further reduced our footprint in wholesale to really focus even more on those top performing doors where we can both project the brand in a way that's consistent with the image we want to build and also drive the type of profitability that we know we need to achieve within this space. So, that's how we're thinking about it, we're going to leverage targeted marketing in order to guide consumers from those channel - those parts of the business that we are exiting to bring them into the parts of the business that represent the future of the company. And I have to say, over the past few months, we've ramped up our capabilities in terms of CRM consumer segmentation, consumer targeting, and we feel quite good about our ability to leverage this as a way to build our business and get back to growth and value creation in the long term.

Next question, please.

The next question comes from Michael Binetti with Credit Suisse.

What should we think about it - just a quick modeling question. What should we think about as a sustainable run rate that we should expect for gross margin through this year? And then I have a follow-up, if it's okay.

Well, Michael - well, as you know, we're not giving specific guidance, but I think as you can think about the underlying gross margin expansion, if you look at Q1 in terms of gross margin, about two-thirds of the 730 basis points wasn't almost entirely channel and geography related due to COVID impact. So one-third was really driven by pricing and promotions, and underneath the covers, if you looked at AUR growth, we had our AUR growth in Q3, Q4 and into Q1, was exactly the same. So sort of the eight points that we called out in Q4, we - continued Q3, Q4, Q1, continued. So, we expect gross margin expansion for the year. I do expect there to be some volatility in underlying gross margin as we move through, and we move through some inventory management as we cycle through the year, but we are still calling for gross margin expansion for the year, with the benefits going to the - major benefit is going to be pricing and promotion work that we continue to do, the elevation work that we're doing, and continued benefits from geography, but they're going to be much less significant than what you saw in Q1. Q1, obviously, because of the impact of COVID was out stated. There are some offsets, in terms of FX, was a pressure, and I expect that to continue through the year because of our hedge positions. And some of the liquidation and excess that we move to factory has a higher cost and that has some pressure on gross margin as we move through as well. But those are the dynamics at play. We're very encouraged by our gross margin progress and expect to see it continue.

Thank you. Next question.

The next question comes from Alexandra Walvis with Goldman Sachs.

Thanks so much for taking the question here. I wanted to ask a couple of questions on the digital momentum and the digital operating margin. So firstly, can you talk in a little bit more detail on the drivers of that very strong digital operating margin, and where that margin now sits versus the stores and the wholesale? And then, my second question on digital, the North America growth number was a little weaker than the growth in international. I understand that part of that was the discipline that you're showing on pricing and promotions. So I'm wondering how you're thinking about balancing that going forward? Thank you.

Sure. So, Alex, the number one driver of profitability across the regions in digital was our progress on AUR. We had extremely strong AUR, double-digit growth, AUR growth in Q1, led by AUR growth very strong in North America and across Europe. So, very positive, and the largest driver. Obviously, with the digital momentum we saw, we also saw nice SG&A leverage, especially, on our digital commerce sites in EMEA and Asia, where as we called out the comps were up in the 40s, and over 50% in Asia. So, very strong growth leveraging SG&A. We really worked to drive AUR by significantly reducing site wide promotions. We were down 43 days on a - to the quarter last year and the work that we're doing that Patrice called out in terms of personalization, and specific consumer targeting and personalization, we're very encouraged by that. And I think that those results are most notable as you look at into our EMEA results. As you called out, the pressure point in North America for us is our continued work on quality of sales which has pressured our international or Diego consumers, they were down over very strong double-digits. And that was counterbalanced by high teens growth in our domestic consumers. But as I pull apart the performance differences across region, really it is that international consumer that is the challenge point in North America. But very encouraging, over a 1,000 basis points of profitability improvement, led by gross margin and SG&A improvement across all the channels.

Next question.

The next question comes from Simeon Siegel with BMO Capital Markets.

Hope you're both doing well through all this. Jane, congrats on that AUR and gross margin. Just - so as you look at that ability to drive those numbers on lower ads, did anything change in how you're thinking about the health and size of the business longer-term. And then, Patrice, just as you think about the marketing spend to your earlier point about being able to take share and being well capitalized, just curious on your thoughts on go-forward, how you're going to approach marketing. And then in this hopefully transitory period of meaningful revenue compression, how do you measure the return on marketing during the current period? Thanks.

Yes, I think that our continued progress, and I'm really calling out underlying AUR growth, gives us even more confidence in our gross margin story, over the long-term, and that the strength of our brand gives us confidence that this continued AUR story is durable over time and into the long-term, and just gives us conviction that we're doing the right work to elevate the brands and elevate our distribution. So, I think it just strengthens our confidence in our future, and the strength of the strategy.

And then, on marketing, specifically, if you see - obviously we're brand builders, first and foremost, right. We're storytellers, that's at the heart of this company, so we wanted to continue to invest in marketing. You've seen our progress over the past few years, progressing from kind of 3% of sales, on our way to at least 5%, and I'd like us to go beyond over time. So we're going to continue that, this year, based on our forecast where you will see a continued progression of marketing investment relative to sales compared to the prior year. When we look at how to structure the marketing activities, I think we're becoming even clearer now based on what we're seeing with consumers and what they're responding to, that this two-pronged approach is really working well for us. First element of the plan is really the storytelling around purpose, values based communication, whether that's first Polo, Pride, the flag stores picked activities that we did, recently, the support on diversity and inclusions, we're going to continue to drive that. And then, coupled with very targeted TRM digital marketing, and again the ambition here is to be able to do ultimately one-to-one marketing, so that the message you get, the way the site looks when you get on it is perfectly tailored to you, your profile, your history with us, your centers of interest, and I think we're making good progress there. In terms of measurement, which is near and dear to my heart, we've made good progress on a few capabilities. First of all, ROI, obviously, is the first lens that we look at, all right. And in some activities it's easy to calculate, on others, it's a little more complicated. So we couple that with new measurement that we have now on awareness, brand consideration, and purchase intent scores, which we're able to track in all of our core markets for ourselves versus the past, and versus our competitive set. And I actually feel very good, one, about our ability to measure. And two, about the progress that we are making based on what we saw this past quarter on all three of those metrics.

And Simeon, I just wanted to add some context to marketing spend, down 34% this quarter. But let me tell you, we remain very committed to increasing our marketing investments and growing our marketing investments faster than sales growth. In Q1, while our marketing declined, we anticipate that some of - that much of that is a shift as some of our key marketing events such as the Olympics and Wimbledon shifted out. So, you will see some of that shift for FY '21, and it will underscore our commitment to growing marketing faster than sales.

Next question, please.

The next question comes from Omar Saad with Evercore ISI.

I wanted to ask about career, tailored, dress-you looks. Ralph Lauren's obviously a brand that has quite a heritage of tailored. Have you talked about the percentage of total trends in that business given what's happening with work-from-home? And then, Patrice, did you say in your comments around racial injustice that the company is thinking about evolving how it represents the American dream? Thanks.

So, product categories, first. Yes, obviously, we're selling less tuxedos and evening gowns right now, then maybe, we were prior to the crisis. Here's what we're excited about, Omar, is we are a lifestyle brand, right. So we're not pigeon-holed into tailored clothing or pigeon-holed into evening attire. We have the ability to play credibly across athleisure, across home, across - wear-at-home categories. And I think, we've been able to flex during the past quarter and as we look at our investments moving forward, we're obviously being very close to where the consumer behavior and where the consumer interests are. And making sure that we align perfectly to that, and I think we're able to do it in a way that's incredible. So, I feel good about that, and I think we will be able to navigate this crisis by flexing up and down based on where the consumer is really interested in going. As far as portraying the American dream is concerned, absolutely. I think, obviously, all the conversations we've had with our Black African-American colleagues inside the company, since the murder of George Floyd, and the discussions on racial injustice, and systemic racism, along with the conversations we had with the communities that we operate in, clearly, encouraged us to evolve how we project the American dream. How do we - what are the stories that we tell, what are the creators that we portray, how do we show up in a way that's really core to who we are fundamentally from a value standpoint, but evolve the execution to make sure that everywhere we connect with consumers, it is relevant in a 2020-2025 world.

Last question, please.

Our final question comes from Erinn Murphy of Piper Sandler.

My question is around the wholesale channel. I think you referenced that you closed 200 lower performing doors in the quarter. Can you just expound upon what doors you've closed. And then, as you reassess your wholesale footprint, are there further points you see yourself pruning, not just here in North America, but also in U.S. Thank you.

So, our guiding principle, in terms of wholesale presence is really the combination of - and the brand show up in a way that is consistent with the image we want to build, and is the location financially attractive. So yes, as you mentioned, we've closed a bit more than 200 different locations in the U.S. over the past few months. It's pretty spread out, Erinn, across the different partners, right, including the one that declared bankruptcy, yesterday. But fully generalized, really looking at what are the top doors at our key partners and that's where we want to disproportionately focus. And then, we also want to work with them to accelerate even further digital commerce performance. As far as, what does the future entail, listen, we're going to stay agile, we're going to stay close to the market, we're going to stay close to our consumers, and we'll adjust as needed. We are finding that this significant intervention is what's needed at this point. So, I don't anticipate a major change in the coming months. But, obviously, we know in this time of uncertainty and disruption, the agile and the resilience are the ones that win, and we want to be part of that group.

Thank you.

All right. Well, listen, thank you to everyone for joining us today, and we look forward to sharing our second quarter fiscal '21 results with you this fall. And in the meantime, take good care and have a wonderful day.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.